TMI Blog2023 (7) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings. FIU-IND had, with the aid of data disclosed on the record of these proceedings drawn the attention of the Court to the increase in the value of transactions completed on the PayPal platform between 2020 to March 2022 and stated that the transactional value which stood at Rs. 9951 crores in 2020 had increased to Rs. 12327 crores in 2021 and as of March 2022 that figure stood at Rs. 3048 crores. While the Court has taken note of the global trends and the multifaceted complexities which emerging technologies and tools have brought on in the fight against money laundering and terror financing, it has done so only to broadly note the scenario which prevails and which appears to have prompted FIU-IND to require the petitioner to comply with reporting obligations under the PMLA. Central Theme of Payments and Settlements System Act 2007 (PSS Act) - HELD THAT:- The PSS Act essentially appears to regulate the functioning of Intermediaries and PAs who are directly engaged in handling funds and acting as a conduit between customers and e-commerce sites/merchants. This is also evident from the activities relating to settlement and netting which are spoken of in Section 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Court seeks to underline is that the meaning to be ascribed to the phrase payment system must necessarily be ascertained bearing in mind the theme and ethos of the PMLA as opposed to an answer that is beclouded by how that subject is treated under the PSS Act. Approaching the issue from any other angle would in fact fall foul of certain well accepted tenets of statutory interpretation as would be manifest from the discussion which follows in the latter parts of this decision. Payment system under PMLA - HELD THAT:- The PMLA constructs various regulatory measures and safeguards to aid and assist the jurisdictional authorities in uncovering proceeds of crime. It must be remembered that the said enactment is not concerned merely with meting out punishment for commission of the crime created by Section 3 thereof. The various declarations, disclosures and reporting measures put in place by Sections 11A, 12, 12A, 12AA are all aimed towards discovery and prevention of fraudulent and suspicious transactions. Those provisions are concerned with collation of data, a centralized analysis thereof all of which would then enable the authorities to detect patterns of suspicious fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion so addressed and is of the considered opinion that the question of whether PayPal is liable to be treated as a payment system operator must fundamentally be answered on a construction of Section 2(1)(rb) and (rc) of the PMLA alone and not by its conduct in other jurisdictions where the gamut of services provided by it range far wider than those that are ordinarily extended by an OPGSP. Ultimately the question of whether it is liable to be recognised as a payment system operator would have to be answered solely on the anvil of the statutory provisions embodied in the PMLA. This is precisely what the Court has attempted to focus upon and has hopefully achieved. Its ultimate conclusions, as would be evident from the body of this decision, have remained uninfluenced by the conduct of PayPal in foreign jurisdictions. PAYPAL AND TPAPs - HELD THAT:- The National Payments Corporation of India is an organisation that owns and operates the Unified Payments Interface and is essentially charged with the authority of prescribing rules for and approving the participation of Customer Banks, PSPs, TPAPs and Prepaid Payment Instrument issuers in the UPI. More fundamentally in terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of their letter dated 20 December 2019. It was, in the considered opinion of this Court, imperative for FIU-IND to have recorded reasons in justification of the levy of the maximum penalty provided under the statute. For all the aforesaid reasons, the Court finds itself unable to be sustain the imposition of penalty as embodied in the impugned order. Deeming fiction argument - HELD THAT:- The Court also finds itself unable to sustain the impugned order insofar as it proceeds to observe that PayPal would be deemed to be a payment system operator. A deeming fiction must stand specifically engrafted in a statutory provision. A legal fiction would be available to be invoked only in a situation where the Legislature engrafts such a measure or frames the provision in language which justifies the existence of such a fiction being recognised to operate. The Court holds that PayPal is liable to be viewed as a payment system operator and consequently obliged to comply with reporting entity obligations as placed under the PMLA. The imposition of penalty in terms of the impugned order dated 17 December 2020 is quashed. The instant writ petition is partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the stand so taken by RBI in those proceedings since the definition of a Payment System under the Payments and Settlements System Act 2007 [2007 Act/PSS Act] is identical to the provision embodied in the PMLA. 2. For the purposes of evaluating the challenge which stands raised, it would be apposite to notice the following essential facts. As per the disclosures made in the writ petition the officials of the petitioner are stated to have participated in a meeting with the Additional Director of the FIU-IND on 08 October 2017 where they had been invited to explain the scope and content of their business operations in India. The petitioner asserts that it had expressed its willingness to cooperate with the FIU-IND in that meeting and remains bound by that obligation even today. On 16 March 2018 FIU-IND issued a communication directing PayPal to register itself as a reporting entity under the PMLA. FIU-IND further asserted that the business model of PayPal clearly established that it would fall within the definition of a reporting entity as embodied in Section 2(1)(wa) of the PMLA. FIU-IND alleged that despite the detailed clarifications that had been submitted by PayPal it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply with the requirements, conditions that are applicable to a reporting entity under the PMLA and the rules made thereunder. Request 7. Based on all of the above, we believe that PayPal is not covered under the definition of a reporting entity under the PMLA and therefore at this time cannot register as such with the India FIU. Despite this, we remain very open and eager to have further discussions with the FIU India to identify an alternative and mutually agreeable solution that supports the FIU and PayPal in our joint goals of disrupting and preventing financial crime. 8. Given the above, we kindly request that you grant us time to meet you in-person for us to seek further guidance and discuss the best possible way forward. 3. On 23 July 2019 FIU-IND issued a Show Cause Notice purporting to be under Section 13 of the PMLA addressed to PayPal and its six officers alleging non-compliance of Section 12 of the PMLA along with Rule 7 of the 2005 Rules. PayPal was in terms of the aforesaid notice called upon to show cause why suitable directions be not issued against them including the imposition of penalties. Responding to the aforesaid show cause notice, Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PayPal providing payment intermediary services. Request 8. Based on what is stated above, we believe that payment intermediaries, such as PayPal, are not covered within the definition of a payment system operator or financial institution and in turn, not covered under the definition of a reporting entity under the PMLA. Therefore, at this time payment intermediaries, such as PayPal, are not required to register as such with the FIU-IND. 9. We wish to further submit that unless the PMLA and/or the applicable rules are amended in order to specifically include payment intermediaries, such as PayPal, within the definition of a payment system operator , we sincerely request that FIU-IND not consider PayPal as a reporting entity required to register with the FIU-IND. B. PA s AND OPGSP s- REGULATORY FRAMEWORK 4. As would be evident from the aforesaid extracts PayPal had reiterated the stand taken on earlier occasions by contending that it was not a payment system operator as defined under the PMLA and that payment intermediaries could not be said to be reporting entities under the enactment. It was PayPal s case further that till appropriate amendments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gateway service providers. Further, Electronic Commerce and Mobile Commerce (e-commerce and m-commerce) service providers have also been acting as intermediaries by providing platforms for facilitating such payments. 1.2 In most existing arrangements involving such intermediaries, the payments made by customers (for settlement of e- commerce/m-commerce/bill payment transactions), are credited to the accounts of these intermediaries, before the funds are transferred to the accounts of the merchants in final settlement of the obligations of the paying customers. Any delay in the transfer of the funds by the intermediaries to the merchants account will not only entail risks to the customers and the merchants but also impact the payment system. 1.3 With a view to safeguard the interests of the customers and to ensure that the payments made by them are duly accounted for by the intermediaries receiving such payments and remitted to the accounts of the merchants who have supplied the goods and services without undue delay, it is considered necessary to frame these directions for the safe and orderly conduct of these transactions. Accordingly, following directions are being issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the account, if this account is the nodal bank account for the intermediary. c) Transfers representing refunds for failed/disputed transactions. ii. Debits a) Payments to various merchants/service providers. b) Transfers to other banks as per pre-determined agreement into the account, if that account is the nodal bank account for the intermediary. c) Transfers representing refunds for failed/disputed transactions. d) Commissions to the intermediaries. These amounts shall be at predetermined rates/frequency. Note : No payment other than the commissions at the pre- determined rates/frequency shall be payable to the intermediaries. Such transfers shall only be effected to a bank account intimated to the bank by the intermediary during the agreement. 3.4 Pending conversion of the existing accounts to internal accounts, banks shall ensure that only transactions as stated at paragraph 3.3 are permitted in these accounts. This process shall be implemented with immediate effect. 4. Settlement 4.1 The final settlements of funds to the merchants are presently guided by business practices followed by the intermediaries/merchants. In ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, 2010 referred to earlier: (i) the facility shall only be available for export of goods and services (as permitted in the prevalent Foreign Trade Policy) of value not exceeding USD 10,000 (US Dollar ten thousand) per transaction. (ii) AD Category-I banks providing such facilities shall open a NOSTRO collection account for receipt of the export related payments facilitated through such arrangements. Where the exporters availing of this facility are required to open notional accounts with the OPGSP, it shall be ensured that no funds are allowed to be retained in such accounts and all receipts should be automatically swept and pooled into the NOSTRO collection account opened by the AD Category-I bank. (iii) The balances held in the NOSTRO collection account shall be repatriated to the Export Collection account in India and then credited to the respective exporter's account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account. (iv) The permitted debits to the OPGSP Export Collection account maintained in India will be: a) payment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the importer where the exporter has failed in discharging his obligations under the sale contract. (vi) The balances held in the NOSTRO collection account shall be repatriated and credited to the respective exporter's account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account. (vii) AD Category -I banks shall satisfy themselves as to the bonafides of the transactions and ensure that the purpose codes reported to the Reserve Bank in the online payment gateways are appropriate. (viii) AD Category -I banks shall submit all the relevant information relating to any transaction under this arrangement to the Reserve Bank, as and when advised to do so. (ix) Each NOSTRO collection account should be subject to reconciliation and audit on a quarterly basis. (x) Resolution of all payment related complaints of exporters in India shall remain the responsibility of the OPGSP concerned. (xi) OPGSPs who are already providing such services as per the specific holding-on approvals issued by the Reserve Bank shall open a liaison office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the intermediary about delivery of goods to the customer. Tr date of expiry of refund period as fixed by the merchant. 7. In terms of Clause 2.1, RBI clarified that while the guidelines would be applicable to PAs, Payment Gateways may as a measure of good practice also adhere to the technology related recommendations as embodied therein. In terms of Clause 3 it placed non-banking PAs under the obligation to obtain appropriate authorisation from RBI under the 2007 Act. Payment Gateways however were not placed under that obligation with it being observed that they were essentially technology providers or outsourcing partners of banks and would thus be bound by the guidelines contained in the 3 November 2006 Circular which essentially dealt with the management of risks and code of conduct to be observed by banks in course of outsourcing of financial services. It proceeded to thereafter set out various baseline requirements which PAs were required to adhere to. These were contained in Clauses 4, 5, 6, 7 8 of that circular and the same are extracted hereunder:- 4. Capital Requirements 4.1. PAs existing as on the date of this circular shall achieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant entity shall submit a declaration in the enclosed format. RBI shall also check fit and proper status of the applicant entity and management by obtaining inputs from other regulators, government departments, etc., as deemed fit. Applications of those entities not meeting the eligibility criteria, or those which are incomplete / not in the prescribed form with all details, shall be returned. 5.2. Any takeover or acquisition of control or change in management of a non-bank PA shall be communicated by way of a letter to the Chief General Manager, Department of Payment and Settlement Systems (DPSS), RBI, Central Office, Mumbai within 15 days with complete details, including Declaration and Undertaking by each of the new directors, if any. RBI shall examine the fit and proper status of the management and, if required, may place suitable restrictions on such changes. 5.3. Agreements between PAs, merchants, acquiring banks, and all other stake holders shall clearly delineate the roles and responsibilities of the involved parties in sorting / handling complaints, refund / failed transactions, return policy, customer grievance redressal (including turnaround time for reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts shall include compliance to PA-DSS and incident reporting obligations. The PAs shall obtain periodic security assessment reports either based on the risk assessment (large or small merchants) and / or at the time of renewal of contracts. 8. Settlement and Escrow Account Management 8.1. Non-bank PAs shall maintain the amount collected by them in an escrow account with any scheduled commercial bank. An additional escrow account may be maintained with a different scheduled commercial bank at the discretion of the PA. For the purpose of maintenance of escrow account, operations of PAs shall be deemed to be designated payment systems under Section 23A of the PSSA (as amended in 2015). 8.2. In case there is a need to shift the escrow account from one bank to another, the same shall be effected in a time-bound manner without impacting the payment cycle to merchants, under advice to RBI. 8.3. Amounts deducted from the customer s account shall be remitted to the escrow account maintaining bank on Tp+0 / Tp+1 basis. The same rules shall apply to the non-bank entities where wallets are used as a payment instrument. 8.4. Final settlement with the merchant by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks the outstanding balance in the escrow account shall be part of the net demand and time liabilities (NDTL) for the purpose of maintenance of reserve requirements. This position shall be computed on the basis of the balances appearing in the books of the bank as on the date of reporting. 8.11. The entity and the escrow account banker shall be responsible for compliance with RBI instructions issued from time to time. The decision of RBI in this regard shall be final and binding. 8.12. Settlement of funds with merchants shall not be co-mingled with other business, if any, handled by the PA. 8.13. A certificate signed by the auditor(s), shall be submitted by the authorised entities to the respective Regional Office of DPSS, RBI, where registered office of PA is situated, certifying that the entity has been maintaining balance(s) in the escrow account(s) in compliance with these instructions, as per periodicity prescribed in Annex 3. In case, an additional escrow account is being maintained, it shall be ensured that balances in both accounts are considered for the above certification. This shall also be indicated in the certificate. The same auditor shall be employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts the Core Portion eligible to earn interest. C. ESSENTIAL FACTS 8. Reverting then to the facts of the present case FIU-IND is stated to have granted an opportunity of personal hearing to PayPal in terms of its letter of 21 November 2019 and invited it to make a presentation before it on 09 December 2019. After the aforesaid meeting PayPal filed detailed written submissions dated 20.12.2019. Apart from the contentions which it raised in that letter, PayPal also submitted a draft on possible information sharing approaches vide a separate email of 20 December 2019, relevant parts whereof are extracted hereinbelow:- Approach 1 - PayPal can continue to share information on an ad-hoc basis. In 2019, FIU-India raised 2 requests with PayPal and in both cases, information was shared with FIU-India within 48 hours of the request being raised. The requests were received by PayPal via email. To further enhance this approach, FIU-India can utilize PayPal Safety Hub (a PayPal law enforcement information sharing platform) which will enable FIU-India officers to raise a request and receive the information from PayPal. PayPal will be able to provide on-site guidance to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position as to whether companies like the Petitioners who claim to , be facilitators of monetary transactions, both in foreign exchange and in Indian Rupees, ought to be categorised as payment system operators and hence reporting entities under the PML Act. Let the Committee meet within ten days and the conclusion of the Committee be filed, by way of an affidavit, within two weeks thereafter. 12. In the meantime, the following directions are issued: i. The Petitioner shall, henceforth, maintain records of all transactions under Section 12(l)(a) of the PML Act, in electronic form on a secure server, located in India, for the same to be retrieved, if required, subject to further orders in this writ petition. ii. The Petitioner shall furnish a bank guarantee, to the satisfaction of the Registrar General of this Court, for a sum of Rs. 96 lakhs. The said bank guarantee shall be deposited within two weeks. iii. The Managing Director of the Petitioner Company shall furnish an undertaking to the Court to the effect that it would abide by any orders that may be passed in this petition, including furnishing of data (irrespective of where the servers are located), as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Money Laundering Act, 2002. (ii) Yes, companies like PayPal, who claim to be facilitators of monetary transactions, both in foreign exchange and in Indian Rupee, are categorised as payment system operators and hence reporting entities under the PML Act. D. PSS ACT PMLA- THE STATUTORY STRUCTURE 11. In order to appreciate the submissions which were addressed by learned senior counsels appearing for respective sides, it would be apposite to firstly notice the relevant statutory provisions. The 2007 Act seeks to regulate and supervise payment systems in India and designates RBI to be the nodal agency for all matters connected therewith. The expression electronic fund transfer is defined in Section 2(1)(c) as under: - (c) electronic funds transfer means any transfer of funds which is initiated by a person by way of instruction, authorisation or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers, automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and card payment. 12. Section 2(1)(d) defines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Act or the application for authorisation made under section 7 of this Act is refused by the Reserve Bank; (b) any person acting as the duly appointed agent of another person to whom the payment is due; (c) a company accepting payments either from its holding company or any of its subsidiary companies or from any other company which is also a subsidiary of the same holding company; (d) any other person whom the Reserve Bank may, after considering the interests of monetary policy or efficient operation of payment systems, the size of any payment system or for any other reason, by notification, exempt from the provisions of this section. (2) The Reserve Bank may, under sub-section (1) of this section, authorise a company or corporation to operate or regulate the existing clearing houses or new clearing houses of banks in order to have a common retail clearing house system for the banks throughout the country: Provided, however, that not less than fifty-one per cent. of the equity of such company or corporation shall be held by public sector banks. Explanation . For the purposes of this clause, public sector banks shall include a corresponding n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems affecting domestic transactions and give such directions in writing as it may consider necessary to system providers or the system participants or any other person either generally or to any such agency and in particular, pertaining to the conduct of business relating to payment systems. 20. Section 23 which deals with the subject of settlement and netting reads as under:- 23. Settlement and netting. ( 1) The payment obligations and settlement instructions among the system participants shall be determined in accordance with the gross or netting procedure, as the case maybe, approved by the Reserve Bank while issuing authorisation to a payment system under section 7, or, such gross or netting procedure as may be approved by it under any other provisions of this Act. (2) Where the rules providing for the operation of a payment system indicates a procedure for the distribution of losses between the system participants and the payment system, such procedure shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. (3) A settlement effected under such procedure shall be final and irrevocable. (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulations or bye-laws of the central counter party, the collaterals provided by the system participants towards their settlement or other obligations, return the collaterals held in excess to the system participants concerned. Explanation 1. For the removal of doubts, it is hereby declared that the settlement, whether gross or net, referred to in this section is final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined, whether or not such money, securities or foreign exchange or derivatives or other transactions is actually paid. Explanation 2. For the purposes of this section, the expression central counter party means a system provider who by way of novation interposes between system participants in the transactions admitted for settlement, thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions. 21. Section 23A makes provisions for the protection of funds collected from customers and is extracted hereunder: - 23A. Protection of funds collected from customers. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Bank of India and subsidiary bank as defined in section 5 of the Banking Regulation Act, 1949 (10 of 1949) and included in the Second Schedule to the Reserve Bank of India Act, 1934 (1 of 1934). 22. A reporting entity is defined under section 2(1)(wa) of the PMLA in the following terms:- (wa) reporting entity means a banking company, financial institution, intermediary or a person carrying on a designated business or profession; 23. The expression financial institution is defined in Section 2(1)(l) as follows:- (l) financial institution means a financial institution as defined in clause (c) of section 45-1 of the Reserve Bank of India Act, 1934 (2 of 1934) and includes a chit fund company, a housing finance institution, an authorised person, a payment system operator, a non-banking financial company and the Department of Posts in the Government of India; 24. The word intermediary is defined by Section 2(1)(n) as under:- (n) intermediary means , (i) a stock-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viduals, artificial juridical person incorporated or registered outside India or existing as such and which owns or controls or manages, directly or indirectly, the activities or functions of payment system in India; 26. Chapter IV of the PMLA lays down the obligations of banking companies, financial institutions and intermediaries. Section 12 of the Act reads as under:- 12. Reporting entity to maintain records. (1) Every reporting entity shall (a) maintain a record of all transactions, including information relating to transactions covered under clause (b), in such manner as to enable it to reconstruct individual transactions; (b) furnish to the Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed; (c) *** (d)*** (e) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients. 27. In terms of Section 12A, the Director is empowered to call upon any reporting entity to furnish records referred to in Section 11A, 12 and 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m notifying additional safeguards on any reporting entity in respect of verification of the identity of its client or beneficial owner. Explanation . The expressions Aadhaar number and core biometric information shall have the same meanings as are respectively assigned to them in clauses (a) and (j) of section 2 of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016). 28. Finance Act No. 22 of 2019 which came into effect from 01 August 2019 introduced Section 12AA in the PMLA which reads as follows:- 12AA. Enhanced due diligence. ( 1) Every reporting entity shall, prior to the commencement of each specified transaction, (a) verify the identity of the clients undertaking such specified transaction by authentication under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016) in such manner and subject to such conditions, as may be prescribed: Provided that where verification requires authentication of a person who is not entitled to obtain an Aadhaar number under the provisions of the said Act, verification to authenticate the identity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y direct the concerned reporting entity to get its records, as may be specified, audited by an accountant from amongst a panel of accountants, maintained by the Central Government for this purpose. (1B) The expenses of, and incidental to, any audit under sub- section (1A) shall be borne by the Central Government. (2) If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, without prejudice to any other action that may be taken under any other provisions of this Act, he may (a) issue a warning in writing; or (b) direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or (c) direct such reporting entity or its designated director on the Board or any of its employees, to send reports at such interval as may be prescribed on the measures it is taking; or (d) by an order, impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained by the banking company, financial institution and intermediary, as the case may be; iii) money transfer or remittances in favour of own clients or non-clients from India or abroad and to third party beneficiaries in India or abroad including transactions on its own account in any currency by any of the following:- a) payment orders, or b) cashiers cheques, or c) demand drafts, or d) telegraphic or wire transfers or electronic remittances or transfers, or e) internet transfers, or f) Automated Clearing House remittances, or g) lock box driven transfers or remittances, or h) remittances for credit or loading to electronic cards, or i) any other mode of money transfer by whatsoever- name it is called; iv) loans and advances including credit or loan substitutes, investments and contingent liability by way of- a) subscription to debt instruments such as commercial paper, certificate of deposits, preferential shares, debentures, securitised participation, inter bank participation or any other investments in securities or the like in whatever form and name it is referred to, or b) purchase and negotiation of bills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall furnish the information referred to in clauses (A), (B),(BA), (C), (D), (E) and (F) of sub-rule (1) of rule 3 to the Director on the basis of information available with the reporting entity. A copy of such information shall be retained by the Principal Officer for the purposes of official record. (3) Every reporting entity shall evolve an internal mechanism having regard to any guidelines issued by the Director in consultation with, its regulator, for detecting the transactions referred to in clauses (A), (B),(BA), (C), (D), (E) and (F) of sub- rule (1) of rule 3 and for furnishing information about such transactions in such form as may be directed by the Director in consultation with its Regulator. (4) It shall be the duty of every reporting entity, its designated director, officers and employees to observe the procedure and the manner of furnishing information as specified by the Director in consultation with its Regulator. 32. The obligations placed upon a reporting entity to undertake due diligence in respect of clients is reiterated in Rule 9 which reads thus:- 9. Client Due Diligence.-( l) Every reporting entity shall- (a) at the time of comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of clause (a) and clause (b), submits a KYC Identifier to a reporting entity, then such reporting entity shall retrieve the KYC records online from the Central KYC Records Registry by using the KYC Identifier and shall not require a client to submit the same KYC records or information or any other additional identification documents or details, unless- (i) there is a change in the information of the client as existing in the records of Central KYC Records Registry; (ii) the current address of the client is required to be verified; (iii) the reporting entity considers it necessary in order to verify the identity or address of the client, or to perform enhanced due diligence or to build an appropriate risk profile of the client. (lD) A reporting entity after obtaining additional or updated information from a client under sub-rule (1C), shall as soon as possible furnish the updated information to the Central KYC Records Registry which shall update the existing KYC records of the client and the Central KYC Records Registry shall thereafter inform electronically all reporting entities who have dealt with the concerned client regarding updatation of K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation . For the purpose of this sub-clause 1. Controlling ownership interest means ownership of or entitlement to more than twenty-five per cent. of shares or capital or profits of the company; 2. Control shall include the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements; (b) where the client is a partnership firm, the beneficial owner is the natural persons) who, whether acting alone or together, or through one or more juridical person, has ownership of entitlement to more than fifteen per cent. of capital or profits of the partnership; (c) where the client is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has ownership of or entitlement to more than fifteen per cent. of the property or capital or profits of such association or body of individuals; (d) where no natural person is identified under (a) or (b) or (c) above, the beneficial owner is the relevant na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be, on the form for opening the account: Provided that- (i) the designated officer of the banking company, while opening the small account, certifies under this signature that the person opening the account has affixed his signature or thump print, as the case may be, in his presence: Provided that where the individual is a prisoner in a jail, the signature or thumb print shall be affixed in presence of the officer in-charge of the jail and the said officer shall certify the same under his signature and the account shall remain operational on annual submission of certificate of proof of address issued by the officer in- charge of the jail. (ii) the small account shall be opened only at Core Banking Solution linked banking company branches or in a branch where it is possible to manually monitor and ensure that foreign remittances are not credited to a small account and that the stipulated limits on monthly and annual aggregate of transactions and balance in such accounts are not breached, before a transaction is allowed to take place; (iii) the small account shall remain operational initially for a period of twelve months, and thereafter for a further peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified copies of the following documents, namely or the equivalent e-documents thereof:- (i) registration certificate: (ii) trust deed; and (iii) Permanent Account Number or Form 60 of the trust; and (iv) Such documents as are required for an individual under sub-rule (4) relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf; (9) Where the client is an unincorporated association or a body of individuals, it shall submit to the reporting entity the certified copies of the following documents or the equivalent e-documents thereof, namely:- (i) resolution of the managing body of such association or body of individuals; (ii) Permanent account number or Form 60 of the unincorporated association or a body of individuals; (iii) Power of attorney granted to him to transact on its behalf; [and] (iv) such documents as are required for an individual under sub-rule (4) relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf; (v) such information as may be required by the reporting entity to collectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. (14) (i) The regulator shall issue guidelines incorporating the requirements of sub-rules (1) to (13) sub-rule (15) and sub-rule (17) and may prescribe enhanced or simplified measures to verify the client's identity taking into consideration the type of client, business relationship, nature and value of transactions based on the overall money laundering and terrorist financing risks involved. Explanation .-For the purpose of this clause, simplified measures are not acceptable whenever there is a suspicion of money laundering or terrorist financing, or where specific higher-risk scenarios apply or where the risk identified is not consistent with the national risk assessment. (ia) The guidelines issued under clause(i) shall also include appropriate (A) exemptions, limitations and conditions and alternate and viable means of identification, to provide account based services to clients who are unable to undergo biometric authentication; (B) relaxation for continued operation of accounts for clients who are unable to provide Permanent Account Number or Form No. 60; and (C) exemption, limitations and conditions and alternate and viable means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equivalent e-document is not submitted. Explanation . Obtaining a certified copy by the reporting entity shall mean comparing the copy of the proof of possession of Aadhaar number where offline verification cannot be carried out or officially valid document so produced by the client with the original and recording the same on the copy by the authorized officer of the reporting entity as per the provisions contained in the Act. (16) Every reporting entity shall, where its client submits a proof of possession of Aadhaar Number containing Aadhaar Number, ensure that such client redacts of blacks out his Aadhaar number through appropriate means where the authentication of Aadhaar number is not required under sub-rule (15). (17) (i) A client already having an account based relationship with a reporting entity, shall submit his Permanent Account Number of equivalent e-document thereof or Form No. 60, on such date as may be notified by the Central Government, failing which the account shall temporarily cease to be operational till the time the Permanent Account Number or Form No. 60 is submitted by the client: Provided that before temporarily ceasing operations fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaration to that effect to the reporting entity. E. PAYPAL S CHALLENGE 33. Advancing submissions on behalf of PayPal, Mr. Sibal and Mr. Poovayya, learned senior counsels firstly stated that while the petitioner had been functioning as a PA as well as an OPGSP at the time when the impugned order came to be passed, undisputedly, it has discontinued its PA business with effect from 01 April 2021 and the challenge in the petition thus stands restricted to the question of whether an OPGSP could be said to be a Reporting Agency under the PMLA. The principal submission addressed was that PayPal while operating as an OPGSP cannot be said to be a reporting entity as defined under the Act. 34. For the purposes of lending clarity on the nature of the functions performed by PayPal while working as a payment facilitator, learned senior counsels placed for the consideration of the Court a diagrammatical presentation of its business operations which is extracted hereinbelow :- 35. It becomes pertinent to note that PayPal categorically asserts that it only onboards the Indian exporter and does not enrol the overseas remitter involved in the export transaction. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and systematically routed by the AD Banks at the end of each transaction. 39. Adverting to the fund flow graph, it was pointed out that the overseas remitter effects payment by either using a credit card, bank account or e-wallet and which money is collected overseas by a global acquirer or aggregator. The funds then move from the global aggregator s hands to the AD Banks NOSTRO collection account where it is held in US dollars. The money so received is then transferred to the AD Banks Export Collection Account where funds are then retained in Indian rupees. 40. Learned senior counsels pointed out that the AD Banks both overseas as well as in India, undisputedly, are reporting entities under the PMLA. It was also submitted that it is the AD Banks which undertake the operation of receiving payments, clearing funds and performing settlement activities. According to PayPal, since it merely provides a link to the Indian exporter which is then transmitted to the foreign or overseas buyer and results in the interface created by PayPal being utilised for effective and convenient transfer of funds, it cannot possibly be said that it would fall within the definition of a reporting e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the business model and the details thereof as set forth in these proceedings would clearly establish that it is neither involved in clearing nor is it engaged in providing payment or settlement services. According to PayPal, even the Explanation to Section 2(1)(rb) would not sustain the stand as struck by the respondents since admittedly PayPal is neither enabling credit or debit card operations, smart card operations or money transfer operations. It was submitted that it is not even the case of the respondents that PayPal is engaged in debit card, smart card or credit card operations. It was further argued that the functions performed by PayPal would also not extend to money transfer operations since it at no stage of the entire transaction handles funds which move between the Indian exporter and the overseas buyer. In view of the aforesaid, it was argued that since the technological interface provided by PayPal would not fall within the ambit of Section 2(1)(rb), it cannot be said to be a payment system operator. 45. It was then submitted that the task of regulation and supervision of payment systems is entrusted with the RBI in terms of the PSS Act. PayPal urged that RBI h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot include a stock exchange. 65. While the term settlement has been defined in Section 2(1)(n) of the 2007 Act, there is no definition of the terms payment and clearing . The term settlement, as defined, means, settlement of payment instructions and includes the settlement of securities, foreign exchange or derivatives or other transactions which involve payment obligations. 70. It is pertinent to note, that because PGs do not handle funds, and are only concerned with providing technology infrastructure to route and/or facilitate the processing of online payment transactions, the impugned clauses of the 2020 Guidelines i.e. Clauses 3, 4 and 8 are not made applicable to them. The scope of the work function of a PG in the RBI's discussion paper reads thus: A technology infrastructure provider to route and facilitate processing of an online payment transaction, without any involvement in the actual handling of funds . 71. Therefore, in our view, the answer to the poser, as to whether PAs fall within the ambit of the definition of payment system can only be in the affirmative, for the reasons given above. That being said, as alluded to above, there is, pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as name, city, state, country, telephone, mobile, email and other relevant details are in fact furnished by it to AD Banks. It was further submitted that the remaining information data points which number approximately 1440 are duly captured in Cross Border Wire Transaction Report [CBWTR] prepared by the AD Banks and which in turn is forwarded to FIU- IND. 52. It was further submitted that as would be evident from Clauses 2.1 and 2.2, it is manifest that due diligence obligations are placed on the AD Banks as opposed to an OPGSP. Taking the Court through paragraph 4 of the OPGSP guidelines and which deals with the subject of export transactions, it was again submitted that all obligations including those concerning the opening of a NOSTRO collection account as well as maintenance of an Export Collection Account are those which are placed on AD Banks as opposed to an OPGSP. 53. Mr. Poovayya further argued that undisputedly PMLA imposes numerous penal sanctions. It was submitted that it is a settled principle that statutes with penal implications ought to be interpreted strictly and its provisions be not accorded an expansive construction. Reliance in support of the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words used in the material provisions of the statute must be interpreted in their plain grammatical meaning and it is only when such words are capable of two constructions that the question of giving effect to the policy or object of the Act can legitimately arise. When the material words are capable of two constructions, one of which is likely to defeat or impair the policy of the Act whilst the other construction is likely to assist the achievement of the said policy, then the courts would prefer to adopt the latter construction. It is only in such cases that it becomes relevant to consider the mischief and defect which the Act purports to remedy and correct. 56. Mr. Poovayya further submitted that the impugned order suffers from a more fundamental fallacy since the same proceeds on the precept of a deemed payment system operator. It was contended that in the absence of the statute deploying a deemed fiction, the respondents could not have introduced the concept of a deemed payment system operator. According to PayPal while holding it to be a deemed payment system operator, FIU-IND has clearly travelled far beyond the statute itself quite apart from having exceeded the jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MLA chose to independently define payment system and payment system operator rather than merely incorporating through reference and adopting the provisions of the PSS Act is indicative of the legislative intent to confer a different and distinct meaning upon the phrase payment system for the purposes of the former. According to Mr. Hossain, the fact that the Legislature did not adopt the well-known tool of incorporation by reference is an important indicator of the distinct regimes which stand created under the two statutes. Mr. Hossain submitted that regard must also be had to the fact that PMLA is a statute with a dual character in the sense of it containing penal as well as preventive and regulatory provisions. 60. It was submitted that merely because PayPal is required to be registered as a reporting entity under the PMLA, the same cannot possibly be held to be an obligation which is penal in character. The fact that PMLA comprises of both penal as well as regulatory averments, Mr. Hossain pointed out was one which stands duly recognised by the Supreme Court in Vijay Madan Lal Choudhary vs. Union of India Ors [2022 SCC OnLine SC 929] itself. 61. In order to im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Citibank N.A. India and hence could not be reported in the Cross Border Wire Transfer Reports submitted for the period between April 2017 to July 2020. Citibank further clarified that following receipt of letter of the respondent dated 05.01.2021 the Bank enforced the need to provide actual remitter details with the petitioner and consequently the petitioner furnished the details of actual remitters for the transactions reported. Thus it is the petitioner which had complete details of transactions facilitated by it as an OPGSP and part of these details i.e. actual remitter details were not even shared with the partner banks by the Petitioner in the first place. [A True Copy of the Email dated 20.01.2021 received by the FIU- IND from Citibank is attached herewith and marked as Annexure R-2]. 99. This conduct of the petitioner itself shows that its conduct is suspicious and that the petitioner is creating legal fictions to avoid complying to the laws of India deliberately. The continued hindrance to furnish information of the parties to the transaction is an obstacle created by the petitioner in the legitimate functioning of FIU-India. Further, the transactions in quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a under the OPGSP guidelines based on client instructions. Annexure R2 Subject: RE: Report submitted in response to Alert No. Compliance/2020/01 dated 4th September, 2020. Kind Attn. Sh. Shailesh Thakur / Harish Kumar Dear Sir, Further to our discussion yesterday in respect of our submissions made under FIU-IND's letter reference F.No. 19- 4/COMPL/Misc./2017/FIU-IND dated 5 January 2021, we wish to clarify that the details of actual remitter submitted, did not form part of the original fund transfer instructions received by Citibank N.A. India and hence could not have been reported in the Cross Border Wire Transfer Reports submitted for the period between April 2017 to July 2020. This was also highlighted in our meeting held on 25 February 2020. Following the receipt of FIU-IND's directions on 5 January 2021, the Bank enforced the need to provide actual remitter details with PayPal Payoneer within the FIU-IND defined timelines, through senior management engagement. Consequently, PayPal and Payoneer furnished the details of actual remitters for the transactions reported for the period April 2017 to July 2020 to the Bank in tranches bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and procedures to detect, prevent and report suspicious activity. To comply with OFAC (Office of Foreign Asset Control) requirements, and global sanctions, we screen our customer accounts against government watch lists. In addition, we may request that you provide us with documentation to help prove your identity or for business verification purposes. We report suspicious transactions to the financial intelligence unit in the respective country. 66. Mr. Hossain submitted that PayPal for unjustifiable reasons is seeking to create an exception insofar as India is concerned and thus seeking exemption from coverage under the PMLA. It was submitted that the questions which stand raised cannot be fully appreciated without bearing in mind the various obligations which India is obliged to discharge by virtue of being a member of FATF and comply with the global efforts to fight the malaise of money-laundering. 67. It was submitted that the fight against money-laundering in order to succeed must keep in step with the digital transformation which is reshaping the economies and societies across the globe. It was submitted that the anti-money-laundering and counter terrorist financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the rule of strict construction of regulatory statutes was one which was duly propounded by the Supreme Court in Balram Kumawat vs. UOI AIR 2003 SC 3266 where it was observed as follows:- 24 .The rule of strict construction does not also prevent the court in interpreting a statute according to its current meaning and applying the language to cover developments in science and technology not known at the time of passing of the statute. Thus psychiatric injury caused by silent telephone calls was held to amount to 'assault' and 'bodily harm' under sections 20 and 47 of the Offence Against the Person Act, 1861 in the light of the current scientific appreciation of the link between the body and psychiatric injury. 70. It was the submission of Mr. Hossain that money-laundering and financial crimes clearly fall in the genre of crimes of a special nature and which thus warrant the provisions of the PMLA being interpreted in a manner where the plain intention of Parliament is subserved. It was submitted that unless the provisions of the PMLA were to be interpreted bearing the aforesaid aspects in mind, it would clearly result in a proliferation of unmon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guardians to redeem current loans it did not give them power to do so compulsorily as against the lenders (West Derby [1897) A.C.647). Gift to trustees in order to enable them to bring-up children; see Pear-man v Pearman, 33 Bea. 394. In Lickbarrow Mason, 2 T.R. 63 Ashurst J., said: whenever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it . Enabled in this context means the doing of something by one of the innocent parties which in fact misled the other (Jerome v Bentley Co [1952] 2 T.L.R. 58). A car-owner who entrusts another person with his car and its registration book does not thereby enable that person to dispose of them within the meaning of Sale of Goods Act 1893 (c.71) s.21(2)(a) so as to raise an estoppel against the car-owner (Central Newbury Car Auctions v Unity Finance; Mercury Motors Third Parties) [1957 1 Q.B. 371]. One can do something to enable a person to travel with the London Transport Board By-laws No. 8(1) at any time before that person travels or while he is still telling (Murphy v Verati [1967] 1 W.L.R. 641). 75. According to Mr. Hossa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to make the machinery workable. 77. The statutes must be construed in a manner which will suppress the mischief and advance the object the legislature had in view. A narrow construction which tends to stultify the law must not be taken. Contextual reading is a well-known proposition of interpretation of statute. The clauses of a statute should be construed with reference to the context vis- -vis the other provisions so as to make a consistent enactment of the whole statute relating to the subject-matter. Furthermore, even in relation to a penal statute any narrow and pedantic, literal and lexical construction may not always be given effect to. The law would have to be interpreted having regard to the subject-matter of the offence and the object of the law it seeks to achieve. The purpose of the law is not to allow the offender to sneak out of the meshes of law. The courts will reject the construction which will defeat the plain intention of the legislature even though there may be some in exactitude in the language used. 78. Reducing the legislation (sic to a) futility shall be avoided and in a case where the intention of the legislature cannot be given effect to, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22. It is the settled position of law by a catena of judgments that, a statute is an edict of the Legislature and the conventional way of interpreting or construing a statute is to seek the intention of its maker. A statute is to be construed according to the intent of them, that make it and the duty of judicature is to act upon the true intention of the Legislature. If a statutory provision is open to more than one interpretation the Court has to choose that interpretation which represents the true intention of the Legislature, in other words the legal meaning or true meaning of the statutory provision. The statute must be read as a whole in its context. It is now firmly established that the intention of the Legislature must be found by reading the statute as a whole. 23. The statute to be construed to make it effective and workable and the Courts strongly lean against a construction which reduces a statute to futility. A statute or any enacting provision therein must be so construed as to make it effective and operative. The Courts should therefore reject that construction which will defeat the plain intention of the Legislature even though there may be some inac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty or is actually involving any process or activity connected with the proceeds of crime and projecting it as untainted property. The Division Bench thus in unequivocal terms has held that, the offence of money-laundering under Section 3 of the PMLA is an independent offence. 27. The Division Bench of Madras High Court in the case of VGN Developers P. Ltd. (Supra) has relied upon the decision in the case of Radha Mohan Lakhotia (Supra). The Madras High Court accepted the contention of the learned Additional Solicitor General appearing therein, that, the PMLA is self-contained and stand alone and thus, independent of predicating offence. It has been held that, it cannot be stated that, a mere closure by the CBI would provide a death knell to the proceedings of the Respondent (i.e. ED therein). That, in a given case, the complaint may emanate from a registration of a case involving scheduled offence. But the fate of the investigation in the said scheduled offence cannot have bearing to the proceedings under the PMLA. From the reading of the said decision it is clear that, mere filing of closure report by the Investigating Agency will not create any impediment or hurdle in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to regulate the activities of a payment system operator under the PMLA. This, according to Mr. Tripathi, would clearly flow from the fact that the PSS Act operates in an entirely different sphere. It was submitted that even though the definition of a payment system be more or less identical in the two statutes, the same would have to be appreciated bearing in mind the well settled principle of statutory interpretation that identical words employed in two separate statutes may be ordained and intended to carry completely different meanings. According to Mr. Tripathi, it would be the principle of contextual interpretation which would apply in order to understand and appreciate the distinction which must necessarily be understood to exist and the meaning liable to be ascribed to the phrase payment system under the two statutes. 80. In support of the aforenoted submissions, reliance was placed on the following pertinent observations as entered by the Constitution Bench in D.N. Banerjee vs. P.R. Mukherjee and others AIR 1953 SC 58 : - 11. These remarks are necessary for a proper understanding of the meaning of the terms employed by the statute. It is no doubt true that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenance in this respect on the following succinct observations as appearing in the decision of the Supreme Court in Whirlpool v. Registrar of Trademarks (1998) 8 SCC 1:- 28. Now, the principle is that all statutory definitions have to be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or context. That is why all definitions in statutes generally begin with the qualifying words, similar to the words used in the present case, namely unless there is anything repugnant in the subject or context . Thus there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word had been used and that will be giving effect to the opening sentence in the definition section, namely unless there is anything repugnant in the subject or context . In view of this qualification, the court has not only to look at the words but also to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the purview of payment system, is arbitrary. 158. But Section 18 of the Payment and Settlement Systems Act indicates (i) what RBI can do, (ii) the persons qua whom it can be done, and (iii) the object for which it can be done. In other words, Section 18 empowers RBI (i) to lay down policies relating to the regulation of payment systems including electronic, non-electronic, domestic and international payment systems affecting domestic transactions and (ii) to give such directions as it may consider necessary. These are what RBI can do under Section 18. Coming to the second aspect, the persons qua whom the powers under Section 18 can be exercised are (i) system providers (ii) system participants and (iii) any other person generally or any such agency. The expression system provider is defined under Section 2(1)(q) to mean a person who operates an authorised payment system. The expression system participant is defined in Section 2(1)(p) to mean a bank or any other person participating in a payment system, including the system provider. Other than the expressions system provider and system participant , Section 18 also uses the expressions any other person and any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment of Revenue which was noticed as under:- 7. Department of Revenue representative stated- The definitions of Payment System and Payment System Operator under PMLA are quite exhaustive. These definitions are oriented towards covering the entities from ML/TF risk perspective. Interpretation of the provisions of PMLA is primarily the mandate of Department of Revenue, Ministry of Finance, Government of India. Department of Revenue is of the view that PayPal and other similar entities having similar operations are very well covered in the definitions of Payment system and Payment System operator in PMLA. Hence, PayPal and other similar entities having similar operations fall under the definitions of Financial Institution and hence Reporting entity under PMLA. OPGSP circular of Foreign Exchange Department, RBI makes it incumbent upon the OPGSP to ensure adherence to the information Technology Act, 2000 and all other relevant laws/regulations in force. There is a very high M/TF risk involved in continued co- compliance by such entities in not registering with FIU India and this is negatively impacting the implementation of AML/CFT regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich prevailed at the relevant time and governed payment aggregation services. It was submitted that while RBI at that time had adopted a light touch approach by advising banks to exercise caution on their part and to follow instructions, with the exponential increase in online transactions and the expanding roles performed by such intermediaries, it decided to regulate PA activities in terms of its circular of 17 March 2020. It was submitted by Mr. Tripathi that in light of the prevalent scenario and bearing in mind the Anti-Money Laundering /Terror Financing [AML/TF] risks and challenges which face the Nation, the provisions of the PMLA must be accorded a purposive interpretation and PayPal held to be a payment system operator. H. PROCEEDINGS ON THE PETITION 89. It would be appropriate to pause at this juncture and briefly take note of certain proceedings which ensued prior to the matter being closed for judgement. The Court on 12 January 2021 had taken note of the issues which stood raised and proceeded to constitute a Committee comprising of nominees of the RBI as well as the Ministry of Finance and other stakeholders so that a principled view of those authorities m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... boarded parties to ensure there is no breach of sanctions. Therefore, when the Petitioner takes a stand that it is an innocent intermediary before this Court, such stand is disingenuous and misleading. 4. Under Indian law, the Petitioner, by its own admission, operates as an OPGSP entity. In this regard, reference to the relevant framework of RBI governing OPGSP entities itself makes clear that (emphasis supplied): 2.2 Foreign entities, desirous of operating as OPGSP, shall open a liaison office in India with the approval of the Reserve Bank before operationalising the arrangement with any AD category-I bank. It would be incumbent upon the OPGSP to: (i) ensure adherence to the Information Technology Act, 2000 and all other relevant laws / regulations in force; (ii) put in place a mechanism for resolution of disputes and redressal of complaints; (iii) create a Reserve Fund appropriate to its return and refund policy and (iv) onboard sellers, Indian as well as foreign, following appropriate due diligence procedure. Resolution of all payment related complaints in India shall remain the responsibility of the OPGSP concerned. 5. This makes it cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty / person has been blocked or suspended for fraudulent activity Required to protect business from fraud; Whether any law enforcement requests have been received in respect of Entity / Person Required for screening against blacklists. Note: The above data points are illustrative only and, in the experience of FIU-IND, most large entities in the payments ecosystem collect a large number of datapoints beyond the above. 7. Further, at the time of the Impugned Order, the Petitioner was also operating its domestic business. The arguments above apply in equal measure to this business while it was in operation. 8. In prior hearings, the Petitioner has also sought to equate its business model with other common applications e.g. UPI applications (which are referred to as Third Party Application Providers (TPAPs) in the UPI ecosystem). However, such comparisons are completely misleading and factually erroneous. In the case of the UPI ecosystem, TPAPs are basically software / application providers which provide an interface to access the UPI ecosystem through a bank. They do not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igating illicit financial flows. In this regard, it is the sole prerogative of FIU- IND, which is possessed with the requisite expertise, to determine which data points are of value from a broader financial intelligence perspective. 13. In this regard, it is not open for the Petitioner to submit that it only maintains some data points and rest are filled in by its banking partner. Even if there is a single data point collected by or available to the Petitioner, the same serves as a basis for valuable analytics and pattern detection at the end of FIU-IND. Therefore, the admission of the Petitioner that it provides certain data points not otherwise available to its banking partner itself demonstrates the value of bringing it within the financial intelligence reporting net. 14. Flowing from the above, it is important to understand that FIU-IND receives a wide variety of reports from reporting entities . This includes: o Threshold-based reports i.e. when a transaction above a certain threshold takes place (e.g. cash transactions and cross- border transactions); and o Subjective / non-threshold reports which are based on subjective assessments and analysis of a rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne type of report filed by a reporting entity and the data points to be leveraged to report the same are limited in nature. In contrast, STR reporting requires every reporting entity to leverage all data points available to it to report to FIU-IND. The Petitioner, by its own admission, collects several data points exclusive to it. Regardless of whether the same are shared with its banking partner, the fact remains that the Petitioner is best placed to analyse and report STRs based on the same. 18. Therein lies the logical inconsistency within the case of the Petitioner. On one hand, the Petitioner is at pains to point out that it shares certain data points with banks. In doing so, the Petitioner acknowledges and admits that certain data points (which are shared) are only available with it. Such admission itself establishes the case that the Petitioner itself is only privy to certain data points which can serve as basis for reporting of STRs and other reports. Even a single data point collected by the Petitioner must be leveraged to full extent. Therefore, the admission of the Petitioner establishes the need for it to be covered as a reporting entity . The Petitioner in ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 1010.100(dd)(1)(ii), (iii), (iv), and (v)) in return for currency or a combination of currency and other monetary instruments or other instruments, in an amount greater than $1,000 for any person on any day in one or more transactions. (ii) Facts and circumstances; Limitations. Whether a person is a check casher as described in this section is a matter of facts and circumstances. The term check casher shall not include: (A) A person that sells prepaid access in exchange for a check (as defined in the Uniform Commercial Code), monetary instrument or other instrument; (B) A person that solely accepts monetary instruments as payment for goods or services other than check cashing services; (C) A person that engages in check cashing for the verified maker of the check who is a customer otherwise buying goods and services; (D) A person that redeems its own checks; or (E) A person that only holds a customer's check as collateral for repayment by the customer of a loan. (3) Issuer or seller of traveler's checks or money orders. A person that (i) Issues traveler's checks or money orders that are sold in an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lth care expenses; or (D) It provides prepaid access solely to: (i) Employment benefits, incentives, wages or salaries; or (ii) Funds not to exceed $1,000 maximum value and from which no more than $1,000 maximum value can be initially or subsequently loaded, used, or withdrawn on any day through a device or vehicle; and (2) It does not permit: (i) Funds or value to be transmitted internationally; (ii) Transfers between or among users of prepaid access within a prepaid program; or (iii) Loading additional funds or the value of funds from non- depository sources. (5) Money transmitter (i) In general (A) A person that provides money transmission services. The term money transmission services means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. Any means includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid access offered under a prepaid program that can be used before verification of customer identification under 1022.210(d)(1) (iv) ; or (ii) Sells prepaid access (including closed loop prepaid access) to funds that exceed $10,000 to any person during any one day, and has not implemented policies and procedures reasonably adapted to prevent such a sale. (8) Limitation. For the purposes of this section, the term money services business shall not include. (i) A bank or foreign bank; (ii) A person registered with, and functionally regulated or examined by, the SEC or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC; (iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit. Two primary points arise from the present definition: (1) PayPal is registered as a money transmitter despite the various exclusions included in the statutory provision suggesting its business m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D dated 16 January 2023, it has asserted as under: - i. It may be noted that the Respondent No.l/FIU vide its Note handed over on 16.01.2023 has produced a chart at the end of the Note, indicating that the PayPal Entities in United States, Luxemburg and Australia are complying with certain reporting obligations in the said jurisdiction and thus, the Petitioner ought to be considered a 'Reporting Entity' under the PMLA, It is submitted that the said contention of the Respondent FIU is misconceived and completely erroneous as it fails to appreciate that the PayPal Entities operating in the said jurisdictions are providing/offering services not identical to the services provided by the Petitioner in India. Illustratively, PayPal Inc. incorporated in United States is providing services such as a) Buy and sell cryptocurrencies services; b) Debit and credit card services; c) Receive and send donations; d) Balance holding account services; e) Buy now pay later services (which is a form of a credit facility); f) Point of sale solution services; g) Working capital loan services, h) send and receive payment for both commercial and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligations applicable to the PayPal Entities in each jurisdiction differs from one another, based or) the business/services offered by such entity. 95. Upon the matter being closed for judgement, PayPal placed an Additional Note on the record seeking to explain the reporting obligations discharged by it in different jurisdictions. Apart from placing on the record the statutes which are prevalent in United States, Brazil, Luxembourg, Australia, Singapore, Japan, Hong Kong, China, Thailand, and Malaysia, it also explained the nature of services offered by it in those jurisdictions by way of a detailed chart which forms part of the record. While explaining the extent of the services offered in the United States, it was pointed out that PayPal complies with the provisions of the Currency and Foreign Transactions Reporting Act of 1970 in light of the myriad services provided by it in that jurisdiction and which include the trading of crypto currencies, debit and credit card services, balance holding account services, buy now pay later facilities, point of sale solutions to name a few. In Canada, PayPal disclosed that it complies with the provisions of the Proceeds of Crime (Mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Narcotic Drugs and Psychotropic Substances, the recommendations of the Financial Action Task Force established at that summit and which was followed by the adoption of the United Nations General Assembly Resolution of 23 February 1990. As PMLA itself acknowledges, it came to be enacted in furtherance of India s international obligations to implement various United Nations Resolutions in terms of which member States were called upon to adopt national anti-money laundering legislations and programmes. 99. The history of the coordinated endeavour and integrated reporting measures adopted by nations to combat the threat of money laundering was elaborately traced by the Supreme Court in Vijay Madan Lal as would be evident from the following extracts of that decision: - 94. To highlight the role played by the FATF in combating the menace of money-laundering, the respondent has traced the origin of FATF and stated its process of reviewing the compliance with its recommendations by every State and the consequences of non- compliance. It is submitted that the FATF was established by the Heads of State or Government of the seven major industrial nations (Group of Seven, G-7) joine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... six recommendations; or (iii) It has a low level of effectiveness for 4 or more of the 11 effectiveness outcomes.] 98. It is further submitted that jurisdictions under monitoring then, based on their commitments and compliances, are put in two types of list viz., grey list and black list, which serve as a signal to the global financial and banking system about heightened risks in transactions with the country in question which not only severely affect its international reputation but also impose economic challenges, such as impacting the bond/credit market of the country, impacting the banking and financial sector of the country, affecting cross-border capital flows, especially for the trade sector, documentary requirements for export and import payments, such as letters of credit may become more challenging to fulfil, potentially raising costs and hampering business for companies engaged in trade, adversely affecting the economy due to a lack of investment opportunities which may further deteriorate the financial health of the country and the country may also be deemed as a high-risk country . 99. Further, the learned Solicitor General has relied on a report by the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in jurisdictions where minimum sentences are applied), as well as other specified offences including serious fraud and corruption. It is submitted that the EU Fourth Directive on Money Laundering (2015) aimed to improve the regulatory European framework after taking into account new FATF recommendations published in 2012. 103. To emphasize on the role of international cooperation to combat money-laundering, it has been stated that the Financial Intelligence Unit created by the Egmont Group, which is an international forum to combat money-laundering, should serve as a national centre for receiving, analyzing and disseminating suspicious transaction reports, and should have access on a timely basis to the financial, administrative and law enforcement information that it requires to properly undertake its functions as per the revised FATF Recommendations. 104. The Union of India has further traced the origin of the term money-laundering and stated that the term arose in United States in 1920s, which was used by the American Police Officers with reference to the ownership and use of launderettes by mafia groups as the launderettes gave them a means of giving a legitimate ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untainted. This was obviously subject to the fundamental principles of the domestic law of the countries. However, the growth of the jurisprudence in this law did not stop or end there. As we progressed into a world equipped with the internet and into a digital age, criminals found new ways to launder and the law found new ways to tackle them. In the meanwhile, the FATF was established and it started working towards a goal of preventing money-laundering. It has since its inception been aimed towards reducing cross border and intra State money-laundering activities. In this endeavour, it has made many concerted efforts to study, understand, develop and mutually evaluate the state of the compliance in countries towards reducing money-laundering. Today, as we will see, many of the amendments in the 2002 Act are in response to the recommendations of the FATF. Thereafter, forty recommendations dated 20.6.2003, were made by the FATF which had led to much deliberations go on to show that all endeavours were to be Vienna and Palermo Conventions compliant. During the evolution of the jurisprudence on money- laundering, it was found that India was in fact lacking in some aspects of curbing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court deems it apposite to extract the following passages from that report: - EXECUTIVE SUMMARY While the number and type of terrorist groups and related threats have changed over time, the basic need for terrorists to raise, move and use funds has remained the same. However, as the size, scope and structure of terrorist organisations have evolved, so too have their methods to raise and manage funds. The main objective of this report is to analyse recently identified terrorist financing (TF) methods and phenomena, referred to as emerging TF risks . This report highlights that understanding how a terrorist organisation manages its assets is critical to starving the organisation of funds and disrupting their activities in the long term. Terrorist organisations have different needs, depending on whether they are large, small, or simply constituted of a network of seemingly isolated individuals. The section on financial management explores the use of funds by terrorist organisations, not only for operational needs but also for propaganda, recruitment and training, and the techniques used to manage these funds, including allocating specialised financial roles. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation about FTFs, including returnees. The role of social media in breeding violent extremism has been well reported but less is known about how it used to raise funds for terrorists and terrorist groups. The report finds that there are significant vulnerabilities associated with social media, including anonymity, access to a wider range and number of potential sponsors or sympathisers and the relative ease with which it integrates electronic payment mechanisms. It is also apparent that donors are often unaware of the end-use of funds supported by social media, including crowdfunding, which presents a risk that terrorist organisations can exploit. This report finds that electronic, on-line and new payment methods pose an emerging terrorism financing vulnerability which may increase over the short term as the overall use and popularity of these systems grows. Many of these systems can be accessed globally and used to transfer funds quickly. While transactions may be traceable, it proves difficult to identify the actual end-user or beneficiary. This report presents a number of interesting cases, but the actual prevalence and level of exploitation of these technologies by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave arisen on account of the adoption of internet-based payment services across the globe. While dealing with this aspect it has observed as under: - INTERNET-BASED PAYMENT SERVICES Internet-based payment services provide mechanisms for customers to access, via the Internet, pre-funded accounts which can be used to transfer the electronic money or value held in those accounts to other individuals or businesses which also hold accounts with the same provider. Pre-funded accounts that consumers use for online auction payments are among the most dominant Internet-based payment services. Recipients may or may not be required to register with the payment service provider to receive a funds transfer. Some TF cases involving low-value transactions via online payment systems such as PayPal have also been linked to a number of terrorism suspects. The extent to which these transactions have been used to finance terrorism is unclear. Terrorism suspects have been observed using multiple online payment accounts, combining both verified and guest accounts. Payments appear to be linked to online purchases of equipment and clothing prior to the departure of individuals travelling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited States CHALLENGES ASSOCIATED WITH NEW PAYMENT PRODUCTS AND SERVICES The rapid development, increased functionality, and growing use of new payment products and services (NPPS) globally have created AML challenges for countries and private sector. Notwithstanding the known vulnerabilities, the actual prevalence and level of exploitation of these technologies by terrorist groups and their supporters is not clear at this time and remains an ongoing information gap to be explored. 103. It becomes relevant to note that while dealing with this subject, FATF has specifically referred to a case study involving the financing of terrorist activities by usage of the platform of the petitioner here. The United Nations Office on Drugs and Crime [UNODC] in its 2012 report had also taken note of the growing challenges stemming from the misuse of the internet for terrorist purposes. The Court deems it apposite to extract the following passages from that report: - Technology is one of the strategic factors driving the increasing use of the Internet by terrorist organizations and their supporters for a wide range of purposes, including recruitment, financing, propagan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to requesting Member States with regard to criminal justice responses to terrorism, including the use of the Internet for terrorist purposes, the Terrorism Prevention Branch of UNODC, in collaboration with the Organized Crime and Illicit Trafficking Branch of UNODC and with the support of the Government of the United Kingdom of Great Britain and Northern Ireland, undertook to contribute to the Working Group project through the development of the current technical assistance tool on the use of the Internet for terrorist purposes. The current UNODC publication builds upon the conclusions of the Working Group conferences, and in particular the conference held in Berlin in January 2010, relating to Internet- specific legal aspects of terrorism. In connection with the development of the present publication, UNODC convened two expert group meetings in Vienna, in October 2011 and February 2012, to provide a forum for counter-terrorism practitioners, from a geographically diverse group of Member States, to share their experiences relating to the use of the Internet for terrorist purposes. Experts from a total of 25 Member States participated in these meetings, including senior pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as charities, may also be diverted for illicit purposes. Some terrorist organizations have been known to establish shell corporations, disguised as philanthropic undertakings, to solicit online donations. These organizations may claim to support humanitarian goals while in fact donations are used to fund acts of terrorism. Examples of overtly charitable organizations used for terrorist ends include the innocuously named Benevolence International Foundation, Global Relief Foundation and the Holy Land Foundation for Relief and Development, all of which used fraudulent means to finance terrorist organizations in the Middle East. Terrorists may also infiltrate branches of charitable organizations, which they use as a cover to promote the ideologies of terrorist organizations or to provide material support to militant groups. 105. The extent and reach of payment facilitation platforms and the exponential increase in transactions accomplished thereon is also evident from the disclosures made by FIU-IND in these proceedings. FIU-IND had, with the aid of data disclosed on the record of these proceedings drawn the attention of the Court to the increase in the value of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is concerned with the regulation and supervision of payment systems in India. The expression electronic fund transfer is defined by Section 2(c) to mean any transfer of funds through electronic means through the modes specified therein. It includes transfer, deposit or withdrawal of funds via the internet. The expression gross settlement system as per the definition extracted hereinabove is defined to mean a payment system on the basis of which settlement is accomplished on the basis of separate or individual transactions. The word netting is then specified to mean the amount of money or securities due, payable or deliverable. Sections 2(n), 2(p) and 2(q) define the expressions settlement system participant and system provider as set out hereinabove. In terms of Section 3, RBI has been anointed as the Designated Authority for the purposes of regulation and supervision of payment systems. Section 4 of the PSS Act proscribes any person from commencing or operating a payment system except under and in accordance with an authorisation issued by the RBI. In terms of Section 10, the RBI stands empowered to determine standards relating to various aspects pertaining to payment sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cance is Section 2(1)(n) which defines the expression settlement to mean settlement of payment instructions. The reach of the PSS Act can also be gathered from Sections 10 and 23 of the said enactment and which, while empowering RBI to determine standards, enables it to prescribe the format of payment instructions, timing to be maintained by payment systems as well as the manner of transfer of funds within the payment system itself. The settlement and netting procedure which is governed by Section 23 of the PSS Act relates to the distribution of funds between system participants and the payment system itself. All of the aforesaid provisions and the scheme of the PSS Act clearly appears to indicate that it recognises an authorised payment system operator to be one which dons the role of a repository of funds received from a customer and those funds being retained before their onwards transmission to the beneficiary. 111. The scope of the PSS Act may also be gathered from the Intermediary Directions dated 24 November 2009. The said Intermediary Directions recognise the basic structure of a payment system as comprising of intermediaries who receive funds from customers for the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account, if that account is the nodal bank account for the intermediary. c) Transfers representing refunds for failed/disputed transactions. d) Commissions to the intermediaries. These amounts shall be at predetermined rates/frequency. Note: No payment other than the commissions at the pre- determined rates/frequency shall be payable to the intermediaries. Such transfers shall only be effected to a bank account intimated to the bank by the intermediary during the agreement. 113. Para 4 prescribes the system of settlement which is to be adhered to. It reads as follows: - 4. Settlement 4.1 The final settlements of funds to the merchants are presently guided by business practices followed by the intermediaries/merchants. In order to increase the efficiency of the payment process, it is necessary that banks transfer funds to the ultimate beneficiaries with minimum time delay. It is therefore mandated that banks shall implement the following settlement cycle for all final settlements to merchants. This settlement arrangement shall be implemented within three months of issuance of this circular:- i. All payments to merchants which do not involve tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account. (iv) The permitted debits to the OPGSP Export Collection account maintained in India will be: a) payment to the respective Indian exporters accounts; b) payment of commission at rates/frequencies as defined under the contract to the current account of the OPGSP; and c) charge back to the overseas importer where the Indian exporter has failed in discharging his obligations under the sale contract. (v) The only credit permitted in the same OPGSP Export Collection account will be repatriation from the NOSTRO collection accounts electronically. 115. Of equal significance are the Guidelines on Regulation of Payment Aggregators and Payment Gateways [Guidelines] which came to be issued by RBI on 17 March 2020. The aforesaid circular assumes added significance since the same clearly acknowledges and accepts the distinction between PAs and OPGSPs . This is clearly evident from Para 1.1.1 of the Guidelines which defines PAs to be entities which act as facilitators bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot later than on Tr + 1basis. 8.5. Credits towards reversed transactions (where funds are received by PA) and refund transactions shall be routed back through the escrow account unless as per contract the refund is directly managed by the merchant and the customer has been made aware of the same. 8.6. At the end of the day, the amount in escrow account shall not be less than the amount already collected from customer as per Tp or the amount due to the merchant. 8.7. PAs shall be permitted to pre-fund the escrow account with own / merchant s funds. However, in the latter scenario, merchant s beneficial interest shall be created on the pre-funded portion. 8.8. The escrow account shall not be operated for Cash-on- Delivery transactions. 8.9. Permitted credits / debits to the escrow account shall be as set out below; where an additional escrow account is maintained, credit and debit from one escrow account to the other shall also be permitted. However, inter-escrow transfers should be avoided as far as possible and if resorted to, auditor s certification shall clearly mention such transactions. 8.9.1.1. Credits a) Payment from various customers to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mentioned above. 8.15. No interest shall be payable by the bank on balances maintained in the escrow account, except when the PA enters into an agreement with the bank maintaining the escrow account, to transfer core portion of the amount, in the escrow account, to a separate account on which interest is payable, subject to the following: 8.15.1. The bank shall satisfy itself that the amount deposited represents the core portion after due verification of necessary documents. 8.15.2. The amount shall be linked to the escrow account, i.e. the amounts held in the interest-bearing account shall be available to the bank, to meet payment requirements of the entity, in case of any shortfall in the escrow account. 8.15.3. This facility shall be permissible to entities who have been in business for 26fortnights and whose accounts have been duly audited for the full accounting year. For this purpose, the period of 26 fortnights shall be calculated from the actual business operation in the account. 8.15.4. No loan is permissible against such deposits. Banks shall not issue any deposit receipts or mark any lien on the amount held in such form of deposits. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt and handling of funds from customers, their onward transmission and the account settlement and reconciliation process which is to be undertaken as a consequence of those activities. The aforesaid process also entails settlement and netting practices being adopted since undisputedly the funds received from customers would, at least for some period of time, be held in the hands of the Intermediary or the PA. OPGSPs , on the other hand, are in clear terms acknowledged to be merely technology providers. OPGSPs are accepted to be entities who are not involved in the direct handling of funds. It becomes significant to note that the Guidelines also reiterates this distinction which is recognised to exist between PAs and OPGSPs. 120. The fact that the PSS Act was never intended to extend to OPGSPs is also evident from paragraph 2 of the covering letter under which the aforesaid Guidelines were circulated and the same is reproduced hereinbelow: - 2. A reference is also invited to the discussion paper placed on the RBI website on guidelines for regulation of Payment Aggregators (PAs) and Payment Gateways (PGs). Based on the feedback received and taking into account the impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d directives of the RBI referred to and noticed above, and which have undisputedly been issued with reference to the powers conferred on it by virtue of being the Designated Authority under the PSS Act, also seek to regulate and extend to the activities of Intermediaries, PAs and AD Banks, all of which are directly engaged in the handling and movement of funds. It is for the aforesaid reason that those circulars while peripherally noticing the activities of OPGSPs only mandate certain baseline measures to be adopted. The stand as was taken by RBI in the Abhijit Mishra proceedings when it asserted that PayPal was not recognised to be a payment system operator must therefore and consequentially be understood in the aforesaid light. 125. Regard must also be had to the fact that the remittance of funds electronically is comprised of various sub-elements and may involve numerous parties and entities who participate in and facilitate the culmination of a particular transaction. These elements, as was observed earlier, though constituting a cog in the wheel are part of an entire ecosystem which enables the execution and culmination of an electronic transaction. The collaborative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion which follows in the latter parts of this decision. L. PAYMENT SYSTEM UNDER THE PMLA 128. That takes the Court to the heart of the matter, namely, the interpretation of the relevant provisions of the PMLA. As was noted hereinabove Section 2(1)(rb) defines a payment system to be one which enables payment to be effected between a payer and a beneficiary. On a plain reading of Section 2(1)(rb) and bearing in mind that it uses the expression enables it would appear that any system which facilitates the transfer of funds from a payer to a beneficiary would fall within the sweep of that provision. It becomes imperative to further note that Section 2(1) (rb) further stipulates that such a system may involve either clearing, payment or settlement services or for that matter all of them compendiously. A system which facilitates a transaction between a payer and a beneficiary may thus involve elements of clearing, payment or settlement. However it is not mandatory for a system to be recognised to fall within the ambit of 2(1)(rb) to necessarily be one which performs all the three functions as generally understood. 129. The Explanation then stipulates that the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construing the statute of this nature the court should not always adhere to a literal meaning but should construe the same, keeping in view the larger public interest. For the said purpose, the court may also take recourse to the basic rules of interpretation, namely, ut res magis valeat quam pereat to see that a machinery must be so construed as to effectuate the liability imposed by the charging section and to make the machinery workable. 77. The statutes must be construed in a manner which will suppress the mischief and advance the object the legislature had in view. A narrow construction which tends to stultify the law must not be taken. Contextual reading is a well-known proposition of interpretation of statute. The clauses of a statute should be construed with reference to the context vis- -vis the other provisions so as to make a consistent enactment of the whole statute relating to the subject-matter. Furthermore, even in relation to a penal statute any narrow and pedantic, literal and lexical construction may not always be given effect to. The law would have to be interpreted having regard to the subject-matter of the offence and the object of the law it seeks to achi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned with collation of data, a centralized analysis thereof all of which would then enable the authorities to detect patterns of suspicious financial flows and assist in eradicating the scourge of money laundering. Of equal significance are the provisions comprised in Chapter IX which deals with reciprocal arrangements and gives teeth to the collaborative resolve of nations to tackle the complexities surrounding money laundering. The aspect of collaboration backed by cohesive and collective action amongst various agencies forms the subject matter of Section 72A when it provides for the constitution of an Inter-Ministerial Coordination Committee. The aforesaid discussion indubitably brings to the fore the regulatory aspects of the legislation and establishes that the PMLA goes far beyond being intended to be a mere penal statute. This aspect has also been noticed by the Supreme Court in Vijay Madanlal. It is these salutary objectives of the statute which must be borne in mind while seeking to unravel the intent and scope of its various provisions. 133. The Stroud s Judicial Dictionary defines the word enable to mean the conferment of a power to do something. Similarly, P. Raman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ǝ)l), v. Forms: 5-6 enhable, -bel, 6 enhabile, inhable, -bile, 6-8 inable, 5- enable. [f. EN-+ABLE a.: cf. ABLE v.] 2. To authorize, sanction, empower; to give legal power or license to. Const. to with inf. +3. a. To give power to (a person); to strengthen, make adequate or proficient. Obs. or arch. b. To impart to (a person or agent) power necessary or adequate for a given object; to make competent or capable. Const. for, to, unto. rare in mod. use. c. To supply with the requisite means or opportunities to an end or for an object. Const. to with inf. 5. a. To make possible or easy; also to give effectiveness to (an action). enablement (e'neib(ǝ)lmǝnt). [f. ENABLE v. + -MENT.] The action or means of enabling. 2. a. The process of rendering able, competent, or powerful; the state of being so; concr. something by which one is enabled, a qualification. b. Support, sustenance, maintenance. rare. 3. An equipment, implement. Cf. ENABLE v. 3. 1495 Act 11 Hen. VII. c. 64 Armours Defensives, as..Crosbowes and other enhabilmentis of Werres. involve (in'volv), v. Also 4-8 en-. b. fig. To join as by winding toge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis which constitute critical elements of AML measures. The imperatives of those measures being borne in consideration is clearly merited in light of the interpretative principles which were commended for the consideration of the Court by FIU-IND. 137. Undoubtedly, the technology on which the platform of PayPal rests enables the transfer of money between parties at different ends. The mere fact that the said platform also interacts with AD Category Banks or other PAs would not detract from the platform of PayPal being otherwise understood and recognised to be a system which enables payment and one which is concerned with money transfer operations. The Court deems it apposite to emphasise that bearing in mind the objectives underlying the promulgation of PMLA and the activity that it seeks to regulate and penalise, there appears to be no legal justification to interpret Section 2(1)(rb) to embrace only those entities which are directly engaged in the handling, retention or transfer of funds. 138. Regard must be had to be fact that money laundering is concerned with obfuscating the trail of funds and its integration into legitimate systems and thus enabling money obtained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve conclusion that the actual handling of funds cannot be decisive of whether an entity would fall within the ambit of 2(1)(rb). This is notwithstanding certain facts which have been alluded to by the FIU-IND and stem from the exchange of e-mails between it and Citibank. 141. It would be pertinent to recall that Citibank acts as the nodal bank of PayPal in accord with the Guidelines as framed by the RBI. In its email of 20 July 2019, Citibank had apprised FIU-IND that payments due to Indian exporters are transferred from a PayPal offshore account to a Citibank NOSTRO USD Export Collection Account. In yet another e-mail dated 20 January 2021 it apprised FIU-IND that the details of actual remitter did not form part of the original fund transfer instructions received by it and therefore could not be included in the CBWTR reports submitted for the relevant period. It also apprised FIU-IND that it has now put in place a system to obtain end remitter data for all reportable transactions from PayPal. 142. These emails would appear to cast a doubt on the categorical and unqualified assertion of PayPal of it not handling funds at any stage of a transaction between an Indian benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aharaj Singh v. State of U.P. (1977) 1 SCC 155, as would be evident from the following passage of that decision:- 14. The legislative project and the legal engineering visualised by the Act are clear and the semantics of the words used in the provisions must bend, if they can, to subserve them. To be literal or be blinkered by some rigid canon of construction may be to miss the life of the law itself. Strength may be derived for this interpretative stand from the observations in a recent judgment of this Court [ Thiru Manickam Co v. State of TN, CA 1528 of 1971, decided on October 26, 1976 ] : A word can have many meanings. To find out the exact connotation of a word in a statute, we must look to the context in which it is used. The context would quite often provide the key to meaning of the word and the sense it should carry. Its setting would give colour to it and provide a cue to the intention of the legislature in using it. A word, as said by Holmes, is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used. 146. The Court further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... little purpose, said Lord Macnaghten in Netherseal Co. v. Bourne [(1889) LR 14 AC 228 : 59 LJ QB 66 : 61 LT 125] , if the objects of its care might supplement or undo the work of legislation by making a definition clause of their own. People cannot escape from the obligation of a statute by putting a private interpretation on its language. The courts will always examine the real nature of the transaction by which it is sought to evade the tax. 148. The aforenoted decisions thus speak of words in a statute being liable to be interpreted in the context and setting in which they are used. In fact, the aforesaid precedents also speak of situations where a particular word as occurring in a statute may be intended to be accorded a totally different meaning when used in separate provisions of the same legislation itself. In any case both D.N. Banerjee as well as Shree Baidyanath in unambiguous terms warn us of the folly of a blind ascription of meaning to words appearing in two separate statutes. The adoption of such a course would be more injudicious and unwise when the two statutes are recognised to operate over apparently different subjects or subserve separate legislative ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment solutions as well as remittance and receipt of payments for commercial and personal transactions which occur both on a domestic and at the international level. Similar functions and services are provided by PayPal in Australia. In Singapore, Japan and Malaysia apart from the aforesaid services, PayPal also provides what has now come to be commonly described as digital wallet services. The submission in essence was that since there is no similarity in the nature of services that are provided by PayPal in those jurisdictions when compared with its operations as an OPGSP in India, the statutory compliances that it adheres to cannot be determinative of the question which stands raised. 152. The Court finds merit in the submission so addressed and is of the considered opinion that the question of whether PayPal is liable to be treated as a payment system operator must fundamentally be answered on a construction of Section 2(1)(rb) and (rc) of the PMLA alone and not by its conduct in other jurisdictions where the gamut of services provided by it range far wider than those that are ordinarily extended by an OPGSP. Ultimately the question of whether it is liable to be recognis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tretching over a period of 32 months. According to Mr. Poovayya, the quantification of penalty is thus clearly rendered unsustainable. It was additionally submitted that it is well-settled in law that the imposition of penalty would be justified only if an entity fails to discharge a statutory obligation and provided it is established that it had deliberately chosen to act in defiance of the law or was guilty of dishonest conduct. 155. Mr. Poovayya submitted that bearing in mind the nature of the challenge which was raised by PayPal and the substantive objection taken with respect to the construction to be accorded to the provisions of the PMLA, it cannot possibly be said that its conduct was either deliberate, contumacious or dishonest. To buttress the aforesaid submissions, Mr. Poovayya firstly drew the attention of the Court to the following principles as laid down in Hindustan Steel Ltd. vs. State of Orissa (1969) 2 SCC 627 :- 8. Under the Act penalty may be imposed for failure to register as a dealer Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infringer which gives justification for penalising the infringer on the one hand and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act. 157. As would be evident from a reading of the impugned order, FIU-IND has found PayPal guilty of the following three violations: - (a) Wilful avoidance of its obligations under Section 12 by not registering as a reporting entity, (b) Failure to register and communicate the name and address of its Principal Officer to FIU-IND in violation of Rule 7 of the 2015 Rules and (c) Failure to register and communicate the name and address of its Designated Director to FIU-IND under the aforenoted Rule. 158. The impugned order has then proceeded to compute the penalty as being payable for each month of the 32-month period commencing from 16 March 2018 when PayPal was first placed on notice. The computation of penalty was assailed with Mr. Poovayya contending that there was no justification for PayPal being foisted with the maximum penalty provided for in that provision. Quite apart from the above, it was submitted that Section 13(2)(d) only speaks of penalty being lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... too would seem to indicate that the issues raised by PayPal were not free from doubt and that its challenge was found to, prima facie, raise triable questions. 162. The Court also cannot lose sight of the fact that the stand of PayPal as evident from its communications with FIU-IND was essentially collaborative and a testament to its intent to arrive at a mutually acceptable solution. This is also manifest from its approach of both parties identifying a mutually acceptable mechanism and the suggestion of three models of information sharing forming part of their letter dated 20 December 2019. 163. Proceeding then to the issue of quantification, the Court notes that Section 13(2)(d) does not prescribe or stipulate the imposition of penalty for each month of default. It also does not speak of non- compliance amounting to a continued infraction or one which may warrant imposition of penalty on a monthly basis. The Court also finds merit in the challenge raised with respect to the maximum penalty being imposed on the ground of an abject failure on the part of the respondent to confer consideration on the nature of questions which were raised by PayPal. It was, in the considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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